Accounting Concepts are the foundation to lay an organized accounting system in an organization. Accounting concepts are very vital for every company as this helps to remain in sync with the industries as for using the same accounting concept. All these also help in better comparison. The concepts give the management a better view and help manage the accounting system with an even tone of management.
In detail we will discuss the concepts of accounting in the next prevailing section.
Accounting Concepts got a number of conceptual issues which one must understand in order to develop a strong foundation of how the accounting system works.
These basic accounting concepts are as follows:
1. The Accrual Concept:
Here the revenue is recognized whenever it is earned. While, the expenses are recognized whenever the assets are consumed.
2. Conservatism Concept:
In this concept only the revenue is recognized when there is a reasonable certainty that it needs to be realized. Here the expenses are recognized sooner, right when there is a possibility that it will be incurred.
3. Consistency Concept:
When a business chooses a specific accounting method, it should continue using it for a long time.
4. Economic Entity Concept:
The business transactions are required to be kept separate from those of its owners.
5. Going Concern Concept:
Here the financial statements are prepared on the assumption that the business will remain in operation in the future period too. With this assumption, revenue and expenses recognition may be deferred to a future period.
6. Matching Concept:
The expenses that are related to the revenue should be recognized in the same period in which the revenue was recognized earlier
7. Materiality Concept:
Transactions need to be recorded when not doing so might alter the decisions which are made by a reader of a company's financial statements.
Accounting conventions are the basic guidelines that are used to help the companies to determine how to record the business transactions which are not fully addressed by the accounting standards. These procedures and principles are though not legally binding but these are generally accepted by the accounting bodies. Basically, these are designed to promote the consistency and help the accountants to overcome the practical problems which can arise while preparing the financial statements.
Four main accounting conventions are designed to assist the accountants:
Conservatism: It tells the accountants to the side of caution when providing the estimates for the assets and liabilities which means that when there are two values of a transaction available, the lower one is to be favoured.
Consistency: A company is required to apply the same accounting principles across the different accounting cycles. Once this chooses a method it is urged to stick with it in the future also.
Full Disclosure: Information that is considered potentially important and relevant is to be revealed, regardless of this whether it is detrimental to the company.
Materiality: Like full disclosure, this convention also urges companies to lay all their cards on the table, meaning they need to totally disclose all the material facts about the company.
Accounting principles are the rules and the guidelines that the companies must follow while reporting the financial data. The Standard board issues a standard set of accounting principles in the U.S. which is referred to as (GAAP). Some of the most basic accounting principles include the following:
Economic entity principle
Full disclosure principle
Going concern principle
Monetary unit principle
Revenue recognition principle
Time period principle